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Let's assume for the sake of argument that neither alternative power grids nor

natural-gas turbines will develop sufficiently to challenge incumbent electric power

monopolies. Simple elimination of all existing federal and state economic regulation of

existing electric utilities in that case might allow incumbent utilities to use their market

power to raise prices and produce excess profits. While that is not good news in the short

run, it probably is good news in the long run because the existence of excess profits is an

important source of microeconomic change.

High prices encourage both consumers and potential competitors to search for

cheaper alternatives. For example, the drive toward microgeneration would become all

the more urgent if utilities charged excessively for grid access. The more utilities charged

unreasonable rates for grid access, the more use of the alternative natural-gas grid and

microturbines would occur. In that sense, "monopolistic" behavior by utilities would

ultimately be good for consumers. Mass production, unleashed by proper deregulation,

will work its magic here as it did with innovations like automobiles and cellular phones.

"Look at a 1988 Radio Shack catalog. A cellular phone cost $1,500. Now they're free,"

points out Dallas Federal Reserve Bank economist W. Michael Cox.47

Finally, it is not altogether clear that an unregulated utility monopolist would raise

rates on captive consumers because the rates it charges currently may not be constrained

very much by public utility regulation.48

The Unintended Consequences of Mandatory Open Access

Mandatory open access is unnecessary because competition with the existing

electricity grid is both possible and likely. It is costly as well. The problems are several.

First, the efficient mix of generation and transmission capacity as well as the existence of

rewards for innovation will arise only if transmission and distribution are priced efficiently.

Efficient pricing will result only from private unregulated ownership. Mandatory open

access at regulated rates will dull the effect of important price signals. Second, mandatory

open access will lead to endless legal disputes over whether allowing particular generators

access will compromise grid reliability, and over the boundary between federal and state

authority. Finally, publicly ordered mandatory access creates an unnecessary debate about

stranded costs that can be avoided by simply eliminating the franchise monopoly.

Incentives for Innovation Are Lost

Electricity monopolies should not be protected by public guarantees because

monopolies delay innovation. Until Federal Express came along, for example, the U.S.

Postal Service did not offer overnight delivery of letters, or any other substitutes for

traditional first-class mail. The imposition of mandatory access, rate regulation, and inde-

pendent system operators on electricity transmission will stifle new market innovations in

transmission and distribution because the regulatory regime will stifle the pricing system